Central Banks, slowdown and the need for a stable legal framework

The financial market continues to be supported by the continuous support of Central Banks to governments and companies, by ensuring access to liquidity at low interest rates, favoring the creation of a “Temporary bridge”In complex economic environments such as the one experienced as a result of COVD19. The rule of intervened rates that favor, not only the cost of the debt, but also the obtaining of it, is based on the confidence in its continued action, determining an imperfect balance, but equilibrium, which until now has been sufficient although , is beginning to be pressured by factors such as inflation, and its potential influence on credit rates and spreads, or a slowdown, which raises doubts about the individual risk of each country or company.

Excess liquidity homogenizes. The differences in risk tend to be diluted by the supposed security of obtaining cheap financial resources, determining an asset valuation much more based on liquidity support than on individual reality. The spread that is normally maintained is residual and, in many cases, does not explain the long-term expectation, considering that liquidity is, at least for a period of time, unlimited. Undoubtedly, these premises are still valid in a market that tends to discount a short term whose influence is, for now, much higher than the medium and long scenarios.

In this sense, throughout 2021Due to the need to consider the exit process without affecting stability and having to face inflation spikes, we have seen how the Central Banks continue to develop new measures that support the balance while announcing controlled exit plans. The message is clear we are still here and we are flexible. The latest example occurred this week with the announcement, by the European Central Bank, of a possible new bond buyback program that comes into operation when the emergency purchases come to an end.

The underlying idea is to replace the tool created for the crisis with a new complementary program to operational QE

The underlying idea is to replace the tool created for the crisis with a new complementary program to the existing operational QE (20 billion euros per month). That said, the emergency plan will be reduced, but a vehicle is created to act if necessary. Moreover, a new “policy” is created based on the expectation that in fact already works, by limiting the risk of being able to consider what would happen if it did not exist.

Undoubtedly, one of the most important risks that we are currently facing in the market is the moment of deceleration compared to what was expected in which we have been since before the summer. The real data come down and, therefore, also the annual perspectives, and may influence, as long as it is not a merely temporary situation, on future expectations. The data points to a deceleration significant not only during the third trimester, but also throughout the last, determining a rebalancing of forecasts for the next fiscal year.

In principle, the problems are linked to the lack of supply, which could be crucial, but they also allow us to appreciate the need for a reorganization and, surely, the need for a deglobalization process linked to the structuring of contingency plans. The new economy needs more structure. The change of model has accelerated and the resources to carry it out have not been developed in the same proportion.

Interest rates will remain low but we will see more expensive financing

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Investment in traditional industries that support these new areas, as well as the rapid digitization of processes, are essential to be able to take advantage of and consolidate the growth potential, being also the key for the change of model, with the departure of the obsolete, can be carried out

In Europe, for example, the demand for products manufactured in Germany It is affected by a shortage of materials and long delivery times. The country’s recovery is losing momentum and could do so even more in the coming months of 2021. Factory orders have plummeted -7.7% in the month of August, especially affecting the automobile industry, with a decrease in orders of 12% compared to the previous month. External demand fell by 9.5%.

If there is no stability in the rules that support growth, the difficulty increases, and in many cases makes it unfeasible.

Finally, I want to highlight today the need to balance social politics and growth always within a stable regulatory framework without which neither of the two highly correlated objectives is possible.

The always desirable social policies must be developed together with measures of productive growth that allow to improve bases in a structural way to be able to give them continuity in the medium and long term. For this, it is necessary that the legal environment in which investment is made for growth and development is solid. If there is no stability in the rules that support growth, the difficulty increases, and in many cases makes it unfeasible.

Money, in the fear of changing the rules, can act in two ways, A) demanding a shorter recovery period, normally demanding a higher return in the short term that covers the risk, B) significantly limiting the investment volume, diversifying among other areas and projects. As you can see the risk is significant, since, on the one hand, it means less investment and on the other hand, it implies that the possible attractiveness is limited to short-term investments, which are unlikely to be structural.

A volatile legal environment determines not only less investment, but also divestment processes

Confidence is key when making investments, uncertainty only generates a risk premium. A volatile legal environment determines not only less investment, but also divestment processes. We trust that the fiscal policies developed by Europe are subject to a common regulatory framework superior to that of the individual interests of each country, whose main role must be in the implementation and monitoring of their proper use.

The public initiative must be supported by private initiative, as has usually been done, with the aim of endowing the measures with capillarity and at the same time facilitating the optimization of resources. An adequate use of money based on the speed and flexibility of access to it, together with realistic restructuring and growth strategies that attract even more investment, are decisive in the achievement or non-achievement of success, favoring the possibility of adopting new social measures. Volatility in the rules defined to make investments, are a dangerous obstacle to achieving economic and social goals.

Photo: The Spanish Stock Exchange.  (EFE) Opinion
Inflation, central banks and fiscal policies: keys to an August of limited volatility

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The monetary policies developed since the financial crisis have favored a relatively stable environment to promote new fiscal policies, but the whole system is based on an equilibrium, heavily supported by trust that, if we extreme it, will tend to break.

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